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Friday, June 24, 2011

Unchanged Debt Explosion

CBO’s Long-Term Budget Outlook released this week is essentially the same as last year’s: without a change in policy the debt will explode to over 900 percent of GDP. One difference is that CBO decided not to print out the debt ratio in their spread sheet “Data Underlying Scenarios and Figures” as in the past two year once the ratio went beyond 200 percent. So in the following graph I computed the ratio from the revenues and spending projections. This means that the backdrop used two years ago by the "best Economics 1 lecturer ever" still applies, though the quest lecturer is now 2 years old and we still haven’t fixed the problem.

This is why it is so important to adopt reforms like the ones proposed this week by Congressman Kevin Brady, which would hold down federal spending as a share of GDP and stop the debt explosion. By using potential GDP rather than actual GDP his proposal would eliminate the pro-cyclical spending implied by many other spending cap proposals (which use actual GDP) where federal spending would rise rapidly during booms and fall rapidly during recessions.

Today I touched on the importance of getting spending ratios down and returning to sound fiscal (and monetary) policy in this “Big Interview' with Kelly Evans at the Wall Street Journal